What it means
Investopedia explains that standard options are listed for the months in which futures contracts expire, while serial options are listed for the months in between. Exercising one gives the holder a position in the nearby futures contract, which is normally the next month that has a future.
Corn is a common example: corn futures trade for July and September but not August, so an August serial option would give the right to a September futures position, and its price would be based on the September futures price. The life is short.
Investopedia says most serial options trade for about 30 days or less and begin trading about five days before the previous standard or serial option expires. A shorter life means a smaller time value, so the premium is usually lower than on a longer option.
Exchange rules fix the expiry. The CBOT rulebook for corn options says the last day of trading for any standard or serial option in a given month is the last Friday that precedes by at least two business days the last business day of the calendar month before the named expiry month.
The rule differs by contract, so the specification must be checked. Hedgers use them to cover price risk for a short window.
A producer or a buyer can protect a price for a month without a futures contract in that month. Traders can also use serials to roll a hedge from one month to the next.
The tool has become less central. Investopedia notes that as more futures are listed electronically with fewer gaps, and as weekly and daily options have arisen, shorter-term options have replaced some serials, and listings differ by exchange and product.
A buyer risks the premium paid, while a seller of the option can face large losses and margin calls.
In practice
Real-world examples.
Example
A fictional grain buyer wants cover in August, when no corn future is listed, but a September future exists. She buys an August serial call with a 450 strike for 6 cents on 5,000 bushels. The premium is $300 (0.06 x 5,000), and it is the most she can lose on the option.
Example
At expiry the September corn future trades at 470 cents. The call is worth 20 cents, or $1,000 (0.20 x 5,000). After the $300 premium the net gain is $700, and she is put into a September futures position at 450 if she exercises.
Example
A fictional gold trader wants exposure in March when only February and April gold futures are listed. He buys a March serial option, which on exercise would give him the April futures contract. If he does not exercise it, he loses only the premium, and he can sell the option before expiry to recover whatever time value is left.
Formula
Calculation
Premium cost = Premium per unit x Contract size. With $0.06 x 5,000 bushels = $300.
Intrinsic value of a call = Max(Futures price - Strike, 0). With 470 - 450 = 20 cents per bushel.
Net gain = Intrinsic value x Size - Premium. With $0.20 x 5,000 - $300 = $700.
Break-even for a call buyer = Strike + Premium. With 450 + 6 = 456 cents per bushel.
Worked comparison at three expiry prices, using the same $300 premium. If the September future is 440 cents, the call is worth nothing and the loss is the $300 premium. At 456 cents the call is worth 6 cents x 5,000 = $300, so the buyer breaks even. At 470 cents the call is worth $1,000, giving the net gain of $700.Case study
Seen in the real world.
This case study is fictional and illustrative. Lucia, 47, runs a feed mill in Buenos Aires and buys corn through the year. She wants a price cap for August but sees that no August corn future is listed. Her broker points out the August serial call option, which gives her a September futures position if exercised.
She checks the exchange page for the expiry date and the margin rules. She buys calls for part of her August need and pays the premium. She leaves the rest unhedged because she expects a good crop. The price stays below her strike, so the options expire unused and she loses the premium.
She treats the premium as the cost of the cap. Lucia's closing note records what she would do differently. In this illustrative story she writes down the expiry date, the strike and the price at which the cap would start to pay, so that the next season's decision can be compared with this one. She also records that the premium was a known cost, while an unhedged price spike would have had no limit.
Watch out
Common mistakes.
- Assuming the option settles in the same month, when it gives the next listed futures contract.
- Ignoring the exchange's expiry rule, which can fall earlier than expected.
- Forgetting that the premium is lost entirely if the option expires out of the money.
Questions
People also ask.
What is a serial option?
It is a short-dated option on a futures contract, listed for a month that has no futures expiry.
What does exercising one give?
It gives a position in the nearby futures contract, usually the next month that has a listed future.
Are serial options still used?
Some markets still list them, but weekly options and fuller contract calendars have replaced some of them.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related